Russia is set to begin trialing cross-border crypto payments next week in a bid to circumvent the extensive international sanctions imposed following its invasion of Ukraine. However, experts are doubtful that this strategy will succeed due to the inherent traceability of blockchain transactions and the potential for even tougher sanctions in response.
Russia’s Crypto Experiment
The new legislation, passed in late July and quickly signed into law by President Vladimir Putin, allows for the use of cryptocurrencies in cross-border transactions, although it does not lift the existing ban on using crypto as legal tender within Russia. Instead, the law grants Russia’s central bank the authority to oversee an “experimental” regime for these cross-border payments.
Despite this legal framework, the specifics of how these crypto payments will be conducted remain unclear, as the legislation does not provide detailed rules for these transactions. The central bank’s role in this experimental phase is crucial, as it will determine how the law is implemented in practice.
Sanctions and Economic Pressure
Russia’s economy has been severely impacted by a barrage of sanctions from the U.S., European Union, and other Western nations following its February 2022 invasion of Ukraine. These sanctions have included freezing approximately 300 billion euros ($332 billion) of Russia’s foreign currency reserves and disconnecting select Russian banks from the SWIFT interbank messaging system, making it difficult for Russia to conduct international transactions in U.S. dollars and euros.
Valerie Kennedy, director of investigations at blockchain analytics firm Chainalysis, told CoinDesk that Russia’s move to trial crypto payments signals a continuation of its strategy to find ways around Western sanctions. However, she noted that the use of crypto to avoid sanctions is fraught with challenges, particularly the risk of secondary sanctions, which could penalize any third party that engages in trade with Russia using these methods.
Challenges Ahead
One of the major obstacles to Russia’s plan is the traceability of blockchain transactions. Unlike traditional financial systems, where certain transactions can be hidden or obscured, blockchain technology records every transaction on a public ledger, making it easier for international regulators and watchdogs to track and potentially block illicit activities.
Moreover, if Russia proceeds with this strategy, it could face additional sanctions from the international community, particularly from countries that have already imposed penalties on Russia. These secondary sanctions would not only further isolate Russia economically but also deter other nations and entities from engaging with Russia through crypto, out of fear of facing their own penalties.
